Federal Student Loan Repayments Resume, Threatening U.S. Economy
October 2, 2023
The Resumption of Federal Student Loan Payments
Millions of Americans are expected to resume payments on their federal student loans as the pandemic-triggered freeze, which lasted for over three years, ended on Sunday. This is a source of growing apprehension about the ripple effects it might have on the US economy. The process of loan interest accumulation began anew on September 1st, with loan payments being reinstated from Sunday.
The Broad Impact of Loan Repayment Resumption
Over 40 million individuals collectively bear a debt exceeding $1.6 trillion in federal student loans. “It’s noteworthy that the payment moratorium had been extended numerous times and President Joe Biden’s student loan forgiveness scheme was obstructed by the Supreme Court.” However, it’s anticipated that the administration’s strategies will alleviate the effects of the repayment resumption, one of them being the income-oriented repayment plan targeted towards households with low income. Yet, due to the historically prolonged break, the precise impact of the resumption on households and the economy is indeterminate. It could potentially diminish consumer spending by $9 billion per month as projected by Oxford Economics. Consequently, this could decrease 2023 GDP growth to 1.7%, with a resultant 0.3% decline in 2024.
An Unprecedented Economic Shift
“This is an unprecedented situation where an entire lending market was shut down and then reactivated,” observed Jefferies analyst, John Hecht. He further asserted that this recommencement will likely cause a surge in delinquencies and net charge-offs as well as an increased demand for loans, even if loan origination volumes may dwindle. It’s widely forecasted that discretionary spending will suffer a significant blow. BTIG foresees an impact on the performance of retailers and restaurateurs, while UBS predicts a likely drop in soft goods sales. Stocks related to student loans like SoFi Technologies (SOFI), Navient (NAVI), Nelnet (NNI) and SLM Corp. (SLM) are worth keeping an eye on.
An Optimistic Perspective on Loan Resumption
Investing Group Leader, Fear & Greed Trader, acknowledges the potential risk to consumer spending but also highlights that monthly payments on all types of consumer debt, including student loans, are a minor percentage of income. In contrast, Dane Bowler contends that the resumption of loan payments isn’t a critical situation. He supports this claim by pointing out that the burden of interest and principal is hitting consumers at a time when their financial standing is robust.